When Credit Counselors Prey on Consumers

Dear Readers,
Two weeks ago I told you the government was cracking down on unscrupulous credit counseling services. You know the kind: they promise to run interference with the bill collectors, work out a plan for you to get out of debt, and teach you how to be smarter about using credit in the future so you don't get into the same mess again.

While there are community-based agencies that really will do this and honestly are non-profit, apparently some enterprising folks are mainly interested in lining their own pockets.

On Nov. 19, the Federal Trade Commission (search) filed the first lawsuit in this area, charging a firm called AmeriDebt with engaging in "deceptive practices," i.e. fraud. Joel Winston, director of the Division of Financial Services at the FTC, says the suit alleges that AmeriDebt "told consumers there would be no up-front fee for their services, but didn't disclose that they kept your first monthly payment, which they deemed a 'contribution.'" In other words, the first payment you made allegedly went -- not to your creditors -- but to AmeriDebt itself.

"They also claimed to be non-profit," says Winston, "But the complaint alleges money was, in fact, funneled to [for]-profit companies and individuals."

And what about that "counseling" clients were promised so they could learn how to better manage their money? Allegedly, it didn't exist. According to the FTC's complaint, AmeriDebt did "not teach consumers about their finances or how to handle debt in the future, despite claiming that they do. "

In a related action, the FTC reached a settlement with Ballenger Group, LLC, which Winston describes as "the servicing arm of AmeriDebt. When someone made a payment, they did the processing." Ballenger Group and its parent company agreed to pay $750,000 to settle similar charges.

If the name "AmeriDebt" sounds familiar, it probably is: the company advertised widely on TV, in print and on the internet. In fact, Illinois, Missouri, Minnesota, and Texas have also filed lawsuits against the firm.

The FTC has also set up a toll-free hotline for anyone with an interest in the AmeriDebt case: 1-877-862-0886. However, Winston stresses that if you were ever a client of AmeriDebt, you do not have to do a thing in order to recover some of your money. If the FTC wins this case, it will have access to the company's client list and will automatically contact you.

In the meantime, if you are looking for help managing your debt, visit the FTC's Web site: http://www.ftc.gov.

You'll find two helpful articles with advice on dealing with debt and selecting a legitimate credit advisory service:

"Knee Deep in Debt," and "Fiscal Fitness: Choosing a Credit Counselor."

Winston promises the FTC "will remain active in this area" where companies are "passing themselves off as non-profit.. and taking advantage of consumers."

Take care... literally,




I own a large block of shares of a bankrupt company. If there is no way to sell these shares, how do I get rid of them so I can take the loss on this year's taxes?




Dear Scott,

Unfortunately, just telling the IRS that the company went bankrupt isn't good enough. In a situation much like yours, the Tax Court recently disallowed the write-off of a stock, even though the company went out of

business. According to Martin Nissenbaum, the National Director of Income Tax Planning for Ernst and Young, the ruling said "a corporate stock is not worthless until the last vestige of value has disappeared." The bottom line, says Nissenbaum, is "you can't write off your cost as a loss unless the stock is completely worthless."

And that is something that you, the taxpayer, are required to demonstrate.

For instance, have you received any paperwork from the company informing you of the bankruptcy court's decision? The final ruling will lay out how the remaining assets are to be divided. Generally, everything that's left goes to repay the creditors. This is typically stated in terms of a certain number of cents per dollar owed. But this same document should also say how stockholders are to be treated. Usually, this comes down to a big fat zero. But at least it provides you with proof of what your shares are worth.

The problem is, if this company is already bankrupt, it's not going to spend the money to notify the shareholders.

However, with a bit of digging, you might be able to get your hands on the documentation you need. You can access information on bankruptcy cases by going to: http://www.uscourts.gov/bankruptcycourts.html.

Next, click on the district in which the case was heard. In all probability, it's the one where the company was headquartered. See if the case is listed. You can also contact the appropriate bankruptcy court directly to find out the final resolution.

And what if you discover that -- against all odds -- your shares are worth one-cent apiece? No write-off. In this case, you have to find someone to buy the shares from you in order to establish a selling price. Here's where using a full-service broker can pay off.

Nissenbaum says if the shares have any value at all, the "cleanest" way to establish a selling price is to sell the stock to your broker. Sometimes, large brokerage firms will enter into an "accommodation purchase" to help out clients in this situation. Rather than go through all of the hassle, time and money of tracking down an actual price per share, your broker simply buys the entire lot from you for, say, $1.00. Bingo! You've got your sales price, locked in your loss and now you can write it off.

But if you bought your stock through a discount broker, you could be out of luck. Nissenbaum says they might not be familiar with or have the ability to provide an accommodation sale.

In that case, you can just hit up your good pal, Bernie-the-Bagman. (Kidding, just kidding!) What you're looking for is someone who is not related to you who is willing to buy your stock in what is called an "arms-length" transaction. They give you a buck and you sign over the stock certificate to them. That's another way to establish a sales price. Make sure you document the transaction to keep it official. Draw up a simple receipt which both of you sign and keep a copy just in case your friend Andre-the-Auditor at the IRS has any questions.

By the way, if you are eventually able to establish that your stock has zero value, you will indicate this on either line 1 or 8 of Schedule D when you file your income tax return.

According to Nissenbaum, you simply write "worthless" where the form asks you to enter the amount of the sales proceeds. (Check out IRS Publication 550 which you can access at http://www.irs.gov. On pages 36-7 there are instructions about how to treat worthless securities.)

There is a seven-year statute of limitations for declaring a security worthless -- four years more than the typical three-year limitation. The government gives you more time because they realize it's often difficult to resolve these kinds of issues. Who says the IRS doesn't love you?

Hope this helps,



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